DreamWorks Ani gearing up for big year

Stock on the rise as studio readies three CGI releases for '10

NEW YORK -- It looks as if it's going to be a big year for DreamWorks Animation.

In 2010, DWA will become the first studio to release three CGI animated films in one year. That's a potential game-changer as the studio will have five films hitting screens every two years instead of the three or four so far. It could represent a step removed from DWA's traditional up-and-down in terms of release activity, which has meant a rocky road for the stock during dry spells.

In anticipation of the ramp-up, investors have bid up the stock to the point where it hit an all-time high last week after a UBS upgrade to "buy." DWA shares closed Monday at $40.46 after hitting $42.98 intraday Thursday, their highest mark since the company went public in late 2004.

Some analysts are sounding caution at these levels, arguing that DWA is driven by the success of its film releases more than its peers and must deliver hits.

But Goldman Sachs also is screaming "buy," and UBS analyst Michael Morris last week boosted his target on the stock by a whopping $16 to $50, predicting a 23% upside.

The bulls point out that DWA is developing its three 2010 releases in-house, which cuts expenses. They also highlight 3D and lower costs for productions (down 5%-10% from last year) and advertising as key drivers.

Plus, the company has been diversifying its revenue streams, rolling out consumer products tied to its hit Nickelodeon "Penguins of Madagascar" this year and sending "Shrek the Musical" on tour. DWA management has estimated that nonfeature film revenue will double this year to $200 million, and Stifel Nicolaus analyst Drew Crum estimates that the extra movie for every two year-period will lift gross profits 30% for that period (assuming the film brings in $200 million domestically).

"DWA is a unique media investment at the start of a strong content cycle with no exposure to advertising volatility," Morris said.

This year's three movies compare to the weaker-than-expected "Monsters vs. Aliens," DWA's sole release of 2009. Plus, Morris said he has screened parts of 2010 pics "How to Train Your Dragon" (release date March 26) and "Shrek Forever After" (May 21) and thinks "both look like winners." A glimpse at the third film, "Megamind" (Nov. 5), during a New York presentation last week earned positive reviews from reporters and advertisers, though analysts expect a weaker performance from that pic.

Overall, Morris' outlook calls for DWA's most profitable full year ever. He expects a profit of $2.75 per share; operating income before depreciation and amortization of $347 million; and revenue of $973 million. His latest estimates are all above Wall Street consensus and up 21%-33% from his previous targets.

Goldman Sachs analyst Ingrid Chung has been recommending DWA shares with a "buy" rating since April 29, when the stock closed at $23.87. She even added it to Goldman's "conviction list" at the beginning of October with a six-month price target of $45.

"In small/mid cap entertainment, our favorite stock continues to be DreamWorks Animation," she told THR.

Doug Creutz, analyst at Cowen and Co., rates DWA shares at "outperform," predicting the stock could do at least 15% better than the market in the next year.

Analysts also point out that DWA's DVD sales hold up better than those of many peers because of their family/kids audience.

Growing appetite for 3D will further boost DWA's financials this year, whose slate is all 3D. Selling 51% of its U.S. movie tickets at $3.25 3D premium prices increased the average DWA ticket price by 23% in 2009, Morris said. "We expect that premium to rise to $3.50 in 2010 as more viewers watch at Imax screens," he said.

Others on Wall Street have remained more cautious. Wedbush Securities analyst Michael Pachter has a "neutral" rating on the stock, and Crum has a "hold" on it.
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